Accounting standards and debt covenants: Has the “balance sheet approach” led to a decline in the use of balance sheet covenants?

Peter R. Demerjian

Journal of Accounting and Economics, 2011, vol. 52, issue 2, 178-202

Abstract: Recent years have seen a sharp decline in the use of balance sheet-based covenants in private debt contracts. I hypothesize that changes in accounting standards can explain part of this decline. Standard setting has shifted towards a “balance sheet approach”, which I predict has made the balance sheet less useful for contracting. I measure the effect of the balance sheet approach on specific borrowers using a volatility ratio. I find that borrowers with greater volatility ratios are less likely to have balance sheet-based covenants. This evidence is consistent with reductions in the contracting usefulness of the balance sheet being associated with reductions in balance sheet covenants.

Keywords: Debt contracting; Covenants; Accounting standards; Balance sheet (search for similar items in EconPapers)
JEL-codes: G21 G28 M41 M48 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (55)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:52:y:2011:i:2:p:178-202

DOI: 10.1016/j.jacceco.2011.08.004

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